January 2015 Public Sector Letter, "Helping Participants Manage 'Longevity Risk' in Light of the Increasing Importance of Defined Contribution Plans: New Rules Make Qualifying Longevity Annuity Contracts a Small First Step"

Abstract

An average of 10,000 baby boomers are set to retire in the United States every day between now and 2030, raising questions about retirement readiness. While a large percentage of public sector employees participate in a defined benefit (DB) plan and most are also covered by Social Security, both of which provide a stream of retirement income, individual retirement savings - including from a state or local government employer's defined contribution (DC) retirement plan and an individual retirement account (IRA) - also play a significant role. Longer life expectancies and rising health care costs mean that public sector retirees must carefully plan to ensure having an adequate income that will last for their lifetime.

One sign that the federal government is taking steps to address the problem is the issuance by the Department of the Treasury and the Internal Revenue Service (IRS) of final rules eliminating a regulatory barrier for a certain type of annuity, called a qualifying longevity annuity contract or QLAC. Under this form of annuity, payments are scheduled to begin sometime after the participant's retirement and continue for life, thereafter.

Although these regulations remove a small impediment to lessening longevity risk within employer-sponsored DC plans and IRAs and may help plans offer solutions to participants concerned about "outliving their money," they are only part of the solution. As discussed in this Public Sector Letter, these new rules are just one step and should be considered in the context of all the issues sponsors face in helping their employees attain retirement income adequacy.